Budget 2026: UPI Subsidy Under Review? Payment Firms May Reportedly Push Government For Higher Subsidy

Payment operators are poised to ask the government for an increase in UPI subsidy for low-value payments, in order to sustain the zero-MDR regime, according to a report from The Economic Times.

Payment aggregators believe the current allocation is far below what is required to keep the UPI's zero-cost model financially stable.

For 2025-26, the central government allocated Rs 427 crore for digital payment incentives. This is well below the Rs 2,000 crore allocation that was made in the previous year.

To put things into perspective, India's digital payments ecosystem collectively spends Rs 5,000-6,000 crore every year to subsidise UPI's person-to-merchant transactions that are valued below Rs 2,000.

"We need upwards of Rs 6,000 crore to support low-value UPI transactions, far higher than the Rs 427 crore currently budgeted,” said a senior executive at a major payment operator.

MDR or merchant discount rate, is the fee merchants pay to banks or payment operators to facilitate a transaction.

The government has enforced a zero MDR structure for UPI since 2020, thus forcing payment companies and banks to absorb the transaction costs, which stands at roughly Rs 2 per low-value transaction, as per the report.

Meanwhile, industry representatives will also seek approval to levy a 25–30 basis point MDR on small-ticket payments made at large merchants, who have an annual turnover above Rs 10 crore.

The industry argues that high-volume, high-turnover entities can absorb a nominal fee, thus creating a more sustainable economic framework for UPI.

This comes amid government's fluctuation support for UPI payments. While incentives for digital payments stood at Rs 1,500 crore in 2021-22 and even Rs 3,500 crore in 2023/24, it has fallen to Rs 427 crore in the latest year.

Despite the funding cuts, however, UPI continues to dominate India's payment ecosystem, account for about 85% of transactions by volume. Last month, UPI set a record of 20.7 billion transactions, worth Rs 27.28 lakh crore.